DST 1031 Pros and Cons: What Every Real Estate Investor Should Know

If you're considering a 1031 exchange, you may have heard about Delaware Statutory Trusts (DSTs) as a passive investment option. DSTs have become increasingly popular among investors looking to defer capital gains taxes while enjoying the benefits of institutional-quality real estate—without the headaches of active property management.

But is a DST right for you? Let's explore the pros and cons of a DST 1031.

In this article, we’ll break down the pros and cons of DST 1031 exchanges so you can make an informed decision that aligns with your investment goals.

What Is a DST 1031 Exchange?

A Delaware Statutory Trust (DST) is a legal entity used to hold title to investment real estate. Through a DST, multiple investors can own fractional interests in high-value commercial properties—such as apartment complexes, shopping centers, industrial parks, or medical offices—while deferring taxes through a 1031 exchange.

Instead of buying a property outright, you invest your exchange proceeds into a DST offering that qualifies as like-kind property under IRS guidelines.

Pros of DST 1031 Exchanges

1. Passive Income Without Management Headaches

DSTs are entirely hands-off. You won’t be fixing toilets, chasing tenants, or managing repairs. A professional sponsor or property manager handles everything, allowing you to enjoy truly passive income.

2. Diversification Across High-Quality Assets

DSTs allow you to invest in large, institutional-grade properties you might not afford individually. You can even split your exchange into multiple DSTs to diversify by asset type or geographic location.

3. Qualification for 1031 Exchange Tax Deferral

DSTs are recognized as eligible “like-kind” replacement properties under IRS rules, so your investment qualifies for a 1031 exchange, letting you defer capital gains taxes.

4. Predictable Income Streams

Most DSTs offer stable monthly distributions based on net rental income. While returns are never guaranteed, many DSTs target conservative, income-focused properties.

5. Access to Institutional Real Estate

Through a DST, individual investors gain access to Class A real estate—properties typically reserved for large institutions or REITs.

6. Estate Planning Advantages

Upon death, heirs receive a stepped-up basis, potentially eliminating capital gains tax on inherited DST interests. It’s a powerful estate planning tool for legacy-minded investors.

Potential Trade-Offs of DST 1031 Exchanges (and When a Traditional 1031 Might Be a Better Fit)

1. Limited Liquidity

DSTs are designed for long-term, stable income—but that comes with a trade-off: they are not liquid investments. Your capital is typically tied up for 5–10 years, until the property is sold.👉 Looking for shorter-term flexibility or planning another 1031 exchange soon? A direct real estate purchase may offer more control over your timeline.

2. No Operational Control

DST investors take a hands-off approach, which can be ideal for those looking to retire from management. But if you enjoy being actively involved in renovations, tenant relations, or property strategy, a traditional 1031 exchange allows you to maintain that decision-making control.

3. Market Risk Still Applies

DSTs are backed by real assets, which means they’re still subject to market cycles, tenant performance, and interest rate shifts. These are risks shared with any real estate investment, but because DSTs are passive, you can't step in to make operational changes.👉 Prefer the ability to actively manage performance? A traditional 1031 may allow you to respond more nimbly to market dynamics.

4. Costs and Fees

DSTs typically include sponsor fees, management costs, and acquisition expenses. These are built into the structure and may affect net returns.👉 Looking to maximize every dollar? A traditional exchange may offer more transparency and control over transaction costs—especially if you're experienced in property acquisition.

5. Accredited Investor Requirement

Most DST offerings are limited to accredited investors, which means you’ll need to meet certain income or net worth thresholds.👉 New to real estate investing? A traditional 1031 exchange might be more accessible while still offering tax deferral benefits as you grow your portfolio.

6. Less Flexibility for Future Exchanges

DSTs are long-term investments, and you can’t sell or refinance your portion independently. If you're planning to roll into another exchange soon, this could limit your flexibility.👉 Want to stay agile with your portfolio? A traditional 1031 structure gives you more control over exit timing and reinvestment strategies.

Is a DST Right for You?

A DST can be an excellent fit if you:

• Want to exit active property management

• Need to complete a 1031 exchange

• Prefer steady, passive income

• Value diversification and institutional-quality assets

• Are an accredited investor with long-term goals

However, if you want full control, flexibility, or liquidity, a traditional 1031 exchange might be the right move for you.

Final Thoughts

Understanding the pros and cons of DST 1031 exchanges is key to making the most of your real estate portfolio. While DSTs offer powerful tax benefits and passive income potential, they also come with trade-offs in control, liquidity, and investor eligibility.

Still have questions about DST 1031 exchanges? Our team at APX 1031 is here to help. Get in touch for a complimentary consultation and see how you can make your next move your smartest yet.